An unfortunate reality of doing business today is chargebacks. There are two types of fraud – true and friendly fraud. With the former, a bad actor has obtained sensitive card data of which they are not the owner and uses that information to make a purchase (aka identity theft). In the case of friendly fraud, a less malicious form of chargeback, a request for chargeback happens largely due to customer confusion. The customer may have made a purchase and then forgot, may not recognize a charge made by another family member, or perhaps simply misunderstood a return policy.
Whether true or friendly fraud, these chargebacks originate when a cardholder doesn’t recognize a charge on their statement and calls her issuing bank to dispute it. Unless a merchant can prove that the charge was a legitimate purchase, it is often left to eat the cost of the chargeback, which includes not only fines and fees, but the cost of shipping, the cost of the product, and more.
Cost of Chargebacks: More than Lost Sales
Chargebacks are a long-standing problem for merchants. As such, many actually factor in the cost to operational budgets. At first glance, it would seem that every dollar lost to a chargeback would come off your bottom line quite simply. Research from LexisNexis Risk Solutions, however, tells us that the actual chargeback amount is just the tip of the iceberg. In fact, 2017 showed us that every dollar of fraud cost merchants between $2.48 and $2.82 – or roughly more than 2.5 times more than the transaction itself, depending on the industry.
How do these inflated costs happen? They can be seen in everything from additional charges by card companies as a percentage of costs or chargeback fees, time spent disputing charges, or losses from goods and services. The holiday season sees an even higher cost, as fraud cases rise sharply and stretched customer service teams work to address the volume of cases they encounter. Ecommerce merchants processing card-not-present transactions are even more likely to experience year-over-year increases in loss. As online sales continue to grow (16% in 2017, alone), the opportunity for fraud losses through chargebacks will increase, as well.
Real Life, Real Losses
Let’s look at an example of how much a typical retailer will pay for a chargeback :
A $220 charge is disputed over the holiday season by a customer through their VISA account. Due to new VISA chargeback rules, settled disputes require the retailer to provide pages of documentation to support their case. The charge is decided to be fraud and is closed and settled as a chargeback to the retailer.
This $220 charge is projected to cost the retailer a whopping $545.60 for the most modest scenario but could cost them as much as much as $620 in lost productivity, fees, and penalties. Assuming an increase in 16% of online sales next year, this same cost of a chargeback could be represented by almost $720 in losses next holiday season!
Rolling Back Chargebacks – Tips for Merchants
Chargebacks are expensive, and it behooves merchants to enact a system for mitigating customer disputes. While true fraud can never be fully prevented, there are some things smart retailers are doing to reduce friendly fraud and keep losses under control.
First, ensure that your billing descriptors (line-item explanation of charges) are easy to read and identifiable. With card companies making it easier than ever before for customers to dispute a charge with the click of a button, many won’t hesitate to dispute any charge that they don’t recognize. By providing clarity, you can head off unnecessary chargebacks resulting from customer confusion.
Second, many customers resort to chargebacks as a last resort to unresolved customer service issues. If a return or replacement didn’t go as requested, they might use the generous terms of their credit card protections to find a positive outcome. By aiming to provide the best shopping experience possible – including posting clear return policies on your website – you can put yourself in the driver’s seat for making the customer happy without involving the card company in an expensive chargeback scenario.
While some fraud is inevitable, some chargebacks are preventable. Use trends in your card processing statements to identify the type of products, services, and subscriptions that are most like to be disputed, paying careful attention to payment types and the times of day and year that these disputed claims occur. Use the information contained in your data to alert you to the behaviors that will cost you big down the road. Then, take action to implement the security options and customer care policies most likely to prevent them.
